Is Homeowners Insurance Required by Law? Here's What You Need to Know

Written by Posted On Wednesday, 27 March 2019 07:00

Homeowners insurance isn't a legal requirement, but your bank may insist that you have a policy. Here's what you need to know about home insurance.

If you just closed on your first house, congratulations! You've taken a big step in your life and it will be a great adventure.

But you just signed to a long commitment and there's this glaring issue in your mind. This extra fee on top of your mortgage and taxes. Homeowners insurance.

"How necessary is that?" you ask yourself. 

Well, it's not exactly a cut and dried answer. Home insurance isn't federally regulated. Thus, it's up to each individual state in how they regulate homeowners insurance.

But today, we're going to give you a little insight into why home insurance is necessary.

1. Is Homeowners Insurance Legally Required?

There is no law that requires home insurance in the United States. When you actually own your home, it's yours to insure or not. If you let it go to weeds, you're hurting nobody but yourself.

Why then does it seem you're required to buy insurance when you buy a home. Most likely you bought your house with a mortgage. This you got from a banking institution.

When you buy your house with a mortgage loan, you don't technically own the house on your own. Yes, you have the title and deed. Yes, you can pretty much do whatever you like with the property from this point forward. But the bank can repossess the house if you don't pay them back on time for the borrowed money.

Thus, the bank sorta co-owns your house. 

Now, there are laws that require the bank to give you notice if you begin to default on your loans. So, they can't just pull your house out from under you when the price goes up or something. It's still "your" house.

If the bank has a vested interest in your house (if you were to not hold up your end, they need the value to be there when they take it), they would reasonably want the house insured. This means that most mortgage companies and banks will require you buy homeowners insurance before they hand over the money.

2. Why You Really Want Home Insurance

What if you paid for your house in cash? Technically you don't need home insurance, right?

True. Since nobody is telling you to get home insurance, you're free to take a risk on your home. 

Some people say that insurance is a bet. Like in gambling, you're putting money down on something that plays to the odds.

When you get health insurance, you're betting on the odds of you getting so injured, you'd need hospitalization. When you get car insurance, you're betting on the very high likelihood you'll end up in a car accident.

As you probably guess, home insurance is betting on the likelihood something will happen to your home.

Betting on House Fires

Fire is one of the most common ways in which homes get damaged.

The chances that someone in your house will suffer a fire injury is 10%. That seems pretty low, but it's not. You only have a 1.6% chance of being assaulted and a 1.5% chance of getting attacked by a dog.

If your home were to go up in smoke, you'd lose everything. Your entire life is inside that dwelling. 

While it's just things, you're really going to miss them when it begins to rain and you're heading to the homeless shelter. This is what home insurance will keep from happening.

Home insurance covers not only the roof over your head but the things inside the home as well.

When a house burns down, the occupants do have to buy everything again. And there are some things you just can't replace. But at least the insurance will cover most of the loss and you'll recover.

Sometimes, home insurance helps disaster victims move on. In the case of the Camp Fire in Paradise, CA, some people just took the insurance money and left, selling their land. When there isn't a community come back to, sometimes it's wise to just start over someplace else entirely.

Betting on Natural Disaster

If you live in a flood plain, you probably have to purchase flood insurance on top of your home insurance. The thing is, however, that not all insurance covers what we term "acts of God."

Natural disasters usually affect so many people at once, it would cost an insurance company a lot more to insure where disasters typically happen. This is why you likely have to purchase supplemental insurance on top of your basic home insurance if you live in a disaster zone.

The funny thing about this is that basic insurance often covers super unlikely events. 

Let's say you live in Michigan. If the minuscule fault line there burst through the ground and the magma beneath began pouring onto the land, first, you'd probably die, but second, your house would probably be covered. 

Betting on Theft

Say someone breaks into your home and steals your 50-inch flat screen. Yeah, you're sure they'd cover the broken window, but the flat screen cost just as much. 

Well, good news. You'll get a brand new flat screen! But if they stole literally everything you own, you may not be buying the flat screen. 

It really depends on what percentage you've agreed upon with the insurance company. The company will likely cover a percentage of your home replacement cost. This may not cover everything in your home.

Homeowners Insurance is Just Wise

If your home burns down or your prized possessions get stolen, you want to have that backup fund. Of course, you could put money into escrow, but how good are you at budgeting for such things?

While it's not illegal to have no homeowners insurance, it's unwise to go without it. 

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